British Pound: 5 Reasons Why the Pound is Being Pounded

With mixed to slightly better than expected U.K. economic data, traders may be scratching their heads about why the British pound has collapsed more than 300 pips this morning. Here are a couple of reasons:

1. Britain’s Prudential announced plans to buy AIG’s Asia operations for $35.5 billion in cash and stock – since this is partially a cash deal, it will involve selling British pounds.

2. Gilts Losing Luster – According to the FT, the gap between the U.K. and German interest rate has risen to the highest level since 2005. Even though the official U.K. interest rate is less than the Eurozone’s interest rate, the cost of servicing government borrowing in the U.K. over Germany has increased significantly.

3. BoE Could Raise QE – Based upon the dovish comments from Bank of England officials at the beginning of last week, there is a tiny risk of the BoE raising the size of their QE program on Thursday. Even if they do not, the tone of their statement will be dovish which is also bearish for the GBP.

4. Short GBP/USD Positions Hit Record Highs – According to the CFTC Commitment of Traders report published on Friday, short GBP and EUR positions have hit the highest level ever. Forex traders are clearly very bearish pounds and they have good reasons to be with jobless claims at 12 year highs and consumer spending falling by the most since Feb 2009.

5. Stop Orders Tripped, Hedge Fund Selling – There has also been a lot of chatter about hedgies selling the GBP. There were a ton of stop orders sitting at the previous 9 month low of 1.5117. When the GBP/USD broke that level, the currency pair dropped very quickly. The selling exacerbated when stop orders at the 1.50 level were tripped, but the big move came when the GBP/USD broke below 1.4935 – it fell 158 pips in 3 minutes.

With so many straws on the camel’s back, it was bound to fall under the pressure. A bounce is not out of the question after such a big move particularly since the GBP/USD has not able to rally for the past 9 trading days. However unless the BoE stops talking about QE and we don’t expect them too, the GBP will continue to be the worst performing currency.

Finally, the GBP/AUD has hit a record low. Last week, I blogged about how shorting GBP/AUD is my favorite trade. At the time it was trading above 1.73 and today it hit a low of 1.6545. Hopefully you managed to bank some solid profits. I still expect it to move lower – but this is where trailing stops should be implemented to lock in profits.

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25 Comments

  1. Kathy,

    This is a great article.

    One thing I do not understand, and which no-one seems to be addressing is this:

    – The Euro is sinking fast against the dollar.
    – The British pound is being talked down – 88p to the Euro and near parity with the dollar have been suggested.
    – The dollar has lost enormous value, hence the rise in gold.

    All three currencies are losing value against various benchmarks. All appear to be in trouble.

    Which currency will win out in the mid to long term and will a new currency be introduced as the global standard currency to replace the dollar?

    Simon.

    Reply
  2. Simon

    1. Euro sinking faster than the $ due to troubles in Greece
    2. Parity with $ is a bit farfetched. I don’t think it will get there
    3. Correct to some degree because $ is rising now.

    My favorite is still the AUD

    Reply
  3. I think GBP is like a sick child: nothing can make him happy! uptrend of Gold price has no (or weak) effect on GBP.

    Reply
  4. Hi Kathy,

    In the next 6 months, how you think GBP is going to perform against INR? In what range you think it will stay in next 1 yr?

    Reply
  5. Hi Kathy,

    I regular transfer 15,000 UAE Dirhams to UK and have the dirhams changed to Pound sterling on a monthly basis.

    My Forex trader has said to me that I can take advantge of the transfer by fixing a rate for the rest of the year. At present you get 1 Pound equals 5.49 Dirhams. Do you think it will fall further ? I want to fix the rate at the lowest point….

    Reply
  6. I wonder at what point should Canadians start to buy British Pounds? I wonder if the UK would be able to turn to her favorite child, Canada to help bail Her Magesty’s Home Kingdom? I am wondering if I would make money if I buy British Pounds at $1.55 CAD and hold onto it for a bit? How long would it be before I could make any gains on it, do you know? Like getting to 1.80?

    Reply
  7. Hi Kathy,

    I’m going on holiday to Thailand in June and wondered when would be the best time to change currency, any ideas on the matter would be greatly appreciated.

    Thanks

    Reply
  8. Hi Kathy

    Having emigrated to Australia from the UK a couple of years ago, we have an investment that has now matured which we want to convert from GBP to AUD. With record lows at the moment, we are wondering how long we may have to wait to get to semi decent levels of 2.00 dollars to the pound. Your thoughts on whether this could be months or years would be greatly appreciated.

    Mandie

    Reply
  9. Hi Kathy,

    In the next 6 months, how you think GBP is going to perform against INR? In what range you think it will stay in next 1 yr?

    Reply
  10. Hi Katy what do you think the chances are of a return above 1.00-2.10 for GBP-AUD in the long term 2-3 years for GBP transfers for migration?

    Do you think there is likely to be long term recovery back to 1.00-2.40 for GBP-AUD?

    What would be your guess for 1 year high GBP-AUD in 2010?

    Reply

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